American Apparel announces deal with Standard General for up to $25M in financing

American Apparel Inc. announced late Wednesday it had reached a deal with investment firm Standard General to receive an investment of up to $25 million to bolster the clothing chain’s finances. It will also mean a shakeup in the board.

Passersby walk down the street past the American Apparel store in the Shadyside neighbourhood of Pittsburgh on Wednesday. — Photo by The Associated Press

The deal will help pay off a $10-million loan from investment firm Lion Capital, which made a formal demand for payment Monday. Lion Capital claimed that the chain defaulted under its credit agreement because the Los Angeles-based clothing chain ousted its founder and CEO Dov Charney.

As part of the shakeup of the board, five of its seven members, including Charney, will voluntarily step down. The departing directors will be replaced by two new directors, chosen jointly by Standard General and the current board, and three new directors chosen by Standard General. All but one of the new directors are expected to be independent and not affiliated with the investment firm or Charney.

The board will continue to be led by its current co-chairmen David Danziger and Allan Mayer.

On June 18, American Apparel’s board fired Charney as chairman and suspended him as president and CEO. His contract required a 30-day period before he can be terminated. The board cited “alleged misconduct.” The new pact calls for an independent board committee to be formed to oversee the continuing investigation into the alleged misconduct by Charney.

The pact comes two weeks after Charney signed a five-year loan agreement with Standard General to increase his stake in American Apparel to 43 per cent, but the terms stripped him of his rights to vote on those shares without Standard General’s consent.

Under the terms of the loan, Charney agreed that he will not serve on the board nor play any leadership role in the company until the investigation is complete. And Charney will not serve a role at the company if he is deemed “unfit.”

According to the pact between Standard General and American Apparel, Charney will serve as strategic consultant until the end of the investigation. Based on the findings of the investigation, the committee will determine if it is appropriate for Charney to serve as CEO or an officer or an employee of American Apparel.

Standard General and Charney also agreed not to buy additional shares in the company through its 2015 annual meeting.

American Apparel also said the agreement affirmed its commitment to maintaining its manufacturing headquarters in Los Angeles.

Shares rose nearly 4 per cent, or 3 cents, to 88 cents in after-hours trading, after adding a penny to 85 cents in regular trading on Wednesday. The deal was announced after regular trading hours.